*Official* BBCWatcher club

[BBCWatcher]

A lot of people think that if the government requires you to do something at a minimum level, that:

(a) Whatever you're obliged to do must itself be bad (otherwise why would it be required?), but you have no choice;
(b) Doing more than minimum must also be bad.

Both (a) and (b) are logical fallacies. You certainly cannot and should assume them.

For example, the government requires you to send your kids to primary and secondary school. Therefore (a) school must be bad, and (b) university education must also be bad. Right?

Sometimes, or even rather often, the government requires you to do something because you'd be an idiot if you didn't. The government has a few guardrails, in other words, to try to prevent you from doing grave damage to yourself and to your loved ones.

As a notable example, if you don't have at least a BRS-level CPF LIFE retirement income stream (and assuming an owner-occupied home, which is what the property pledge is about), even if you could have afforded that level of set aside during your working career, then you run a serious risk of utter destitution at some point in retirement. If you want to substitute private longevity insurance in place of CPF LIFE, you can, but a very little bit of longevity insurance is now obligatory, if you can afford it (via contributions from work in Singapore). Because there's too much risk of elder destitution without it, so it's an important guardrail. It's a new guardrail in Singapore, true, but in Germany (as one example) the equivalent guardrail has been around for over a century.

As it happens, the total CPF LIFE deal is genuinely excellent value for money. The private market cannot beat it, not even close. So doing more than the minimum is generally a very smart thing for the aspiring wealthy (and already wealthy) to do financially. And when anybody offers a genuinely good deal, I'm interested. If Great Eastern (to pick a random example) wants to offer a better longevity insurance deal, great, I'm perfectly willing to listen.

 

[tangent314]

Tangent314, are you able to run a simulation which involves simply leaving the policy running and taking the cash coupons as cash, to be reinvested elsewhere?

It's a bit trickier because there are two 'bonus' coupons, one at the end of this year. It you surrenders the plan at the end of the year after collecting the $3000 coupon and before paying for the next year's premium, receiving ~$20857 and then put it into say, CPF OA, for 2.5% interest and then RSP $1532 into OA, then you will end up with $73311 at the time of maturity.

 

[maple96]

Hi BBCW, I've received a policy coupon from AIA. It's $xxxx.00 & it's 10% of the face amount of the policy. Now I'm deciding whether to return it to my accumulation account or withdraw it & VC into cpf. I've asked my agent if I return it what's the interest on it and he says it's currently 3.25%. which is not really very clear to me. ie if return does the 3.25% get added onto the sum then accumulate into my account or what?
It's a Life policy BTW.
My question here is does anyone know how this 3.25% interest actually work so I can make an informed decision whether to return or withdraw? If this is too general a question, please let me know what other info I should get & provide to get a clearer picture of it. Thanks

Sent from Motorola NEXUS 6 using GAGT

It is a very common feature of endowment plans which give u a cashback (coupon), so u can use it to pay your next premium, however that will reduce your maturity value. If u choose not to withdraw, then the insurer will pay u estimated interest of 3.25% (your case, non guaranteed) on the coupon amt until maturity, this will increase your maturity value.

Based on what u posted in the later post, it is an endowment plan for 35 years, already completed 14 years? How many coupons have u received todate?

 

[tangent314]

Hi BBCW, I've received a policy coupon from AIA. It's $xxxx.00 & it's 10% of the face amount of the policy. Now I'm deciding whether to return it to my accumulation account or withdraw it & VC into cpf. I've asked my agent if I return it what's the interest on it and he says it's currently 3.25%. which is not really very clear to me. ie if return does the 3.25% get added onto the sum then accumulate into my account or what?
It's a Life policy BTW.
My question here is does anyone know how this 3.25% interest actually work so I can make an informed decision whether to return or withdraw? If this is too general a question, please let me know what other info I should get & provide to get a clearer picture of it. Thanks

Sorry, I just saw this part above.

3.25% is likely to be the value used to calculate the projected returns. Which means the projected returns will be exactly what you will get IF the participating fund performs at 3.25%. If the par fund performs better than that then you will get more, if it is less than that, you will get less. There's another thread somewhere in this forum that lists the performance of all the insurance companies par funds for the past 10 years.

I've already calculated that the projected returns for you looks like 2.16%. Which pretty much means that if AIA earns 3.25%, they will give you 2.16% and keep the rest. If you instead surrender your policy at the end of this year and take out around $20857 and invest that money yourself in a portfolio similar to the par fund and top up $1532 every year, you will end up with $81770 if you achieve the same 3.25% on your portfolio.

 

[BBCWatcher]

Tangent314, usually the surrender value is awful, so I'm curious what you'd project in the "middle ground" case: stick with the policy to the end, but take the coupons and reinvest them elsewhere. How about saving those coupons into a forecast 2.5% yielding SSB portfolio, for example?

 

[a4973]

It is a very common feature of endowment plans which give u a cashback (coupon), so u can use it to pay your next premium, however that will reduce your maturity value. If u choose not to withdraw, then the insurer will pay u estimated interest of 3.25% (your case, non guaranteed) on the coupon amt until maturity, this will increase your maturity value.

Based on what u posted in the later post, it is an endowment plan for 35 years, already completed 14 years? How many coupons have u received todate?

sorry the screen capture was truncated at 35 / 73
actual BI shows i have to pay $1532 / PA till 47/85 yO
accumulated coupons + interest is $8375.xx

 

[foozgarden]

Yes, the interest rate is the same. RA is set aside for your CPF LIFE payouts, and of course that's perfectly fine. Remaining, and any additional, SA funds can be withdrawn from age 55. (They shouldn't be withdrawn, though, unless and until you actually need them. On demand funds earning 4% are absolutely lovely.)


All CPF LIFE levels are great values in lifetime annuities, the very best value Singapore dollar lifetime retirement annuities available. They're so good that they rival the best Wall Street has to offer, and Wall Street isn't really offering the same thing.

The only question, really, is how much longevity insurance you want. None of the CPF LIFE payout levels are lavish, so I'd just opt for ERS-level CPF LIFE (and for my spouse/partner too), and most likely pick the Escalating Plan and start payouts from age 70. For relatively well-to-do and higher people, that's the smartest and best play available. I certainly wouldn't downgrade from FRS-level with a property pledge, even if I could.

One exception: if you already have excellent or better longevity insurance (guaranteed lifetime annuities). As it happens, I/we do. So my decision is more complicated, but at the moment I'm aiming for FRS-level CPF LIFE across the household (still Escalating Plan, age 70).

To net it out, in my view you make CPF LIFE the best it can possibly be as longevity insurance, and that's FRS-level (or preferably above if CPF LIFE is your only longevity insurance), Escalating Plan, age 70. If you can afford it, of course, and most people in this forum can (or will).

Then...and here's the truly magical part...go have FUN, lots of it, knowing that you've got a guaranteed stream of lifetime retirement income that'll take you all the way to the end, even if that's age 108. Money is only useful to exchange for goods and services, at some point in time. That's the only thing it can do. So nail down the long tail well and best, and then have fun.

the last time i tried to work out the XIRR for,ERS vs FRS. i recall that the FRS(standard) , actually was the highest XIRR.
the "breakeven cost" is on the 13th-14th year..
so you need to live at least ( payout year + 14) in order for it worth while, per se.
not sure i did it correctly.
i am trying to find where i kept the excel.

just curious wats the longevity insurance (guaranteed lifetime annuities) that you have besides CPF.

 

[tangent314]

Tangent314, usually the surrender value is awful, so I'm curious what you'd project in the "middle ground" case: stick with the policy to the end, but take the coupons and reinvest them elsewhere. How about saving those coupons into a forecast 2.5% yielding SSB portfolio, for example?

It's actually better to look at the projected values nearer maturity to determine if it is better to stick with the policy. Many endowment plans have the bonuses structured to increase sharply nearer maturity. This is what makes it a bad choice to surrender the plan. If you look at this policy though, it does not have the feature, the cash value increases almost linearly.

So anyway, I did the calculations.
20 years RSP of $900/year at 2.5% + initial lump sum of $11375 + $2100 = FV(2.5%,20,-900,-11375-2100) = $45,070.55
5 years $2100 lump sum at 2.5% = FV(2.5%,5,0,-2100) = $2,375.96
Maturity cash value = $20490

Total = $67936.50

 

[zuppeur]

Yes, and you can combine these actions into one "shield" event if you wish.

Step 1: Raise your "SA shield" strictly before your 55th birthday. (Also one last chance for OA to SA transfers, if your SA has not yet reached the Full Retirement Sum.) That'll let you shield all but $40,000 of SA funds.

Step 2: Celebrate your 55th birthday. Your Retirement Account is created, starting with the ~$40K of unshielded SA funds followed by OA funds.

Step 3A: Withdraw funds (optional, not necessarily recommended unless you need the money). This withdrawal will all come from OA since your unshielded SA will be depleted to create the Retirement Account.

Step 3B: Top up your Retirement Account with cash (and/or with withdrawn funds, which CPF can do for you as a transfer transaction), up as high as the Enhanced Retirement Sum (ERS) if you wish. (Optional, recommended.)

Step 4: Lower the shield.

Spouses/partners can also do this, with your assistance perhaps and around their 55th birthdays.

Can you pls show a working example?

 

[BBCWatcher]

just curious wats the longevity insurance (guaranteed lifetime annuities) that you have besides CPF.

My spouse and I (in the aggregate) are qualified to receive lifetime retirement income streams from two high quality governments outside Singapore, in their currencies of course. Plus Singapore, we forecast. This is one reason why you might wish to consider a stint working overseas, provided you can work long enough to vest.

Can you pls show a working example?

Of a Special Account "shield"? It's anything that qualifies for the CPF Investment Scheme (SA). A Singapore government t-bill maturing just after one's 55th birthday would be a good choice, and a low volatility Singapore government bond fund/unit trust (purchased via a zero sales charge platform: Fundsupermart, POEMS, or DollarDex) would be another good choice for these purposes.

 

[BBCWatcher]

This is what makes it a bad choice to surrender the plan. If you look at this policy though, it does not have the feature, the cash value increases almost linearly.

So your projections are suggesting that a4973 would be wise to exit this policy, and to redeploy the proceeds into something that can reliably yield ~2.2% or more -- Singapore Savings Bonds, as an example. Is that correct?

There's an assumption here that the insurance value of this policy is not particularly useful or valuable. But is it? We're just looking at the investment side of this equation. I suppose if a4973 has plenty of assets already then the life insurance aspect of this policy really isn't interesting, but that's something to check.

 

[tangent314]

Yes, his XIRR with this plan, assuming the projections are met, is 2.16%, so exiting the policy and putting all the money into anything that yields more than 2.16% will get more money.

It's hard to put a dollar sum to the life insurance part. If you have noticed, the death benefit does not include column D, so in effect there is a diminishing payout.

 

[foozgarden]

My spouse and I (in the aggregate) are qualified to receive lifetime retirement income streams from two high quality governments outside Singapore, in their currencies of course. Plus Singapore, we forecast. This is one reason why you might wish to consider a stint working overseas, provided you can work long enough to vest.

i am act working overseas with overseas earned income. but i have not come across such plans that i am eligible . unless becoz i am holding a red passport?
as cpf itself is not enough..
my goal is to have differnt "cpf" type of guaranteed income, in my retired age.
i did look at bank/insurance type annuities. but they suck. so i drop that idea.
if not convenient to share, we can take this offline.

 

[BBCWatcher]

i am act working overseas with overseas earned income. but i have not come across such plans that i am eligible . unless becoz i am holding a red passport?

It entirely depends on the country or countries. They vary, a lot. If you'd like to name the country/countries, I could look into it.

i did look at bank/insurance type annuities. but they suck. so i drop that idea.

Yes, they generally do, I'm afraid. Offshore (outside Singapore) there are some potentially good (or even excellent) products, but those life annuities are bought and paid out in U.S. dollars, for example.

I think you just optimize and exploit CPF LIFE if that's your best life annuity choice, and it is (by far) the best option among Singapore dollar life annuities.

 

[Lucky_Farmer]

Hello BBCW, grateful for your thoughts on my two questions below.
1. Which annual travel insurance you currently have?
2. Please can you do a post on investment strategy, what should we invest in these days like what ST did? I have been longing for this.

 

[foozgarden]

It entirely depends on the country or countries. They vary, a lot. If you'd like to name the country/countries, I could look into it.


Yes, they generally do, I'm afraid. Offshore (outside Singapore) there are some potentially good (or even excellent) products, but those life annuities are bought and paid out in U.S. dollars, for example.

I think you just optimize and exploit CPF LIFE if that's your best life annuity choice, and it is (by far) the best option among Singapore dollar life annuities.

maybe i should elaborate more. i work outside sgp, but not specifically based in any country, per se. so i am all over the shop. you can call it international assignee/worker. hence, i cannot pinpoint an exact country that i work in. but it changes every time. thats why i also have a global cigna plan, annual worldwide travel ins, coz most of the time, i dont have a clue where i will end up .. more often than not, it will be a remote location.

back to the topic, i am trying not to put all my eggs into one basket. as much as i want to be optimistic about the future of the sgp govt. there are no such thing as 100%.
only death and taxes are certain.

 

[BBCWatcher]

1. Which annual travel insurance you currently have?

Bupa Global's "Basic" annual travel medical policy.

2. Please can you do a post on investment strategy, what should we invest in these days like what ST did? I have been longing for this.

I am in broad agreement with Shiny Things.

Where we might differ a little is in the initial split between local (STI) and global stock allocations. I think ST's 50-50 local/global split is OK in retirement, for the ~30% of one's portfolio held in stocks. But I would start off in a not-to-exceed-20/minimum-80 local/global split. Then, starting at 7 to 10 years (in that range) before retirement, these gradual, steady adjustments would be executed and completed over the course of those 7 to 10 years:

(a) The overall portfolio of stocks would shift from ~80% to ~30%;
(b) The local/global split of stocks would shift from <=20% / >=80% to 50% / 50%.

In practice, that should mean that your global stock position is gradually drawn down and your local stock position stays relatively steady. So that approach happens to be rather trading efficient, too -- a happy coincidence.

Part (b) is only for those who plan to retire in Singapore. If you expect to have other plans, there'd be a different glide-to-retirement plan.

I understand the argument with the 50-50 split (currency, fundamentally), but currency simply isn't a problem until you get nearer retirement, especially with the way Singapore's currency is managed. And you're well defended on currency anyway between the ~20% that's not in stocks, including CPF assets and emergency reserve funds such as SSBs. Lack of diversification is a bigger, longer problem if a mere 30 stocks listed in a tiny country represent ~40% of your net worth for decades, and that's a much bigger gamble than the Nikkei 225 Index (Japanese stocks) which actually did tank hard and long. So I'd split the stocks as minimum 80% global index for the long run to retirement, then adjust as retirement approaches. I think that's going to be a safer and more fruitful approach, even if you expect to retire in Singapore.

 

[Prof. Utonium]

Setting camp.

 

[BBCWatcher]

i work outside sgp, but not specifically based in any country, per se. so i am all over the shop. you can call it international assignee/worker. hence, i cannot pinpoint an exact country that i work in.

OK, understood.

The fundamental, threshold question is whether you’ve been contributing into the social insurance systems of any countries where you work. Leaving aside the important question of whether you are obligated to, were you/are you? If you have, then it’s a good idea to try to keep records of those contributions. Then you can see where you stand at any given moment.

Let’s consider an example: the United States. The U.S. has a series of treaties with many countries called “totalization” agreements. Ordinarily you need a minimum of 40 contribution “credits,” earned by paying into the U.S. Social Security system (which is based on a payroll tax). If you have any U.S. “W-2” annual earning statements, they’ll include a box listing your Social Security contributions. You can earn a maximum of 4 credits per calendar year, and it’s hypothetically possible to earn all 4 credits if you have even one paycheck in a given calendar year. The number varies due to an inflation adjustment each year, but for reference in 2018 you earn 1 credit for every US$1,320 of gross earnings that are subject to payroll tax. So a full 4 credits in 2018 only requires US$5,280 of gross earnings from work. There are many people who meet or beat that figure in one paycheck — and a lot of people who need more than one paycheck to hit that number, of course. “Work” is quite broadly defined for purposes of payroll taxability.

But, the totalization agreements mean that you need a minimum of only 6 credits, and then U.S. Social Security can count your contributions into other treaty countries’ systems to account for the other 34. If the other treaty countries’ contributions are enough to get you to the magic 40, then you qualify for some level of U.S. Social Security retirement benefits. Having only 6 credits would likely mean a very modest monthly benefit — U.S. Social Security people do a very complicated calculation to determine that — but that’s how it works. Yes, it’s theoretically possible to have as few as two U.S. paychecks (from which payroll tax was deducted) and then qualify for U.S. retirement benefits.

And the same thing works in reverse. So, for example, if you have 8 1/2 years or more of “enough” contributions into the Japanese system, then that’d be enough, along with the 6 credits in the U.S. (totalized back in Japan) to qualify for some retirement benefits from the Japanese system. So you’d collect some from Japan and some from the U.S. in this example, when the time comes. (And with a couple other caveats and footnotes, notably that U.S. Social Security cannot pay benefits to residents of a few countries and to citizens of a slightly longer list of countries. But Singapore isn’t on either list.)

You can count multiple treaty countries if need be. So 5 years in Japan and 8 credits in the U.S. and some time over in Germany.... That sort of thing. Then you run to each of the treaty countries and file for benefits when the time comes, and they all pay, a little each.

....*And* your same or opposite sex spouse is ordinarily entitled to a U.S. spousal benefit when he/she reaches retirement, which is (ordinarily) half your U.S. retirement benefit. (The U.S. system offers spousal benefits, even if your spouse has never stepped foot in the United States.) Maybe you’re only getting US$10/month or whatever due to a limited contribution history and barely clearing the bar, but then your spouse gets US$5/month...and then shifts from US$5/month over to your US$10/month if you were to predecease him/her. And this amount is adjusted annually for inflation, so it gradually rises. AND ex-spouses sometimes qualify. No, I’m not kidding with any of this.

Anyway, keep track of where you stand right now, as best you can track it. Starting with whether you’ve even contributed at all to any other country’s social insurance system.

 

[perrinrahl]

I am in broad agreement with Shiny Things.

Where we might differ a little is in the initial split between local (STI) and global stock allocations. I think ST's 50-50 local/global split is OK in retirement, for the ~30% of one's portfolio held in stocks. But I would start off in a not-to-exceed-20/minimum-80 local/global split. Then, starting at 7 to 10 years (in that range) before retirement, these gradual, steady adjustments would be executed and completed over the course of those 7 to 10 years:

This is a big difference. It sounds logical but is there data to compare the performance of local vs global stocks/ETFs over the last 10-20 years?